Via Financial Times

Goldman Sachs will avoid setting strict profitability targets at its upcoming investor day, according to people familiar with the plans, leaving executives with more room to manoeuvre in an economic downturn but risking disappointment among shareholders.

The bank’s leadership team, under chief executive David Solomon, is laying the final preparations for the high-stakes event in January, when Goldman will try to steer investors’ attention towards its core Wall Street businesses, instead of its recent push into consumer banking, which insiders say could take a decade to meaningfully have an impact on earnings. 

Among the centrepiece announcements, Goldman is set to detail its ambition to become an asset management powerhouse to rival the likes of Blackstone with the launch of a string of new funds to bolster a new merchant banking division with $135bn of assets under management.

Some elements of Mr Solomon’s plans for Goldman are still in flux, but the key decisions have been taken, including setting targets for “through the cycle” profitability rather than a fixed return on equity or efficiency target for the future.

“Institutions that have tried . . . to be overly precise as to a deliverable [return] have themselves found it frustrating because circumstances can alter that are not entirely in anybody’s control,” said one person familiar with the discussions, citing the vulnerability of trading and investment banking to market conditions. 

Other big Wall Street groups have taken a variety of approaches including annual efficiency targets and medium-term return targets within a range, but Mr Solomon’s team has decided that they could make Goldman a hostage to fortune. Rival Citigroup is facing pressure from investors who doubt its ability to meet targets for returns.

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Glenn Schorr, analyst at Evercore ISI, said there was a “chance some people would be disappointed” by the absence of harder targets but that Goldman, whose shares are trading close to historic lows on a price-to-book basis, still had two months to manage investor expectations.

Goldman’s financial performance has underperformed rivals in recent years, including in the third quarter when it posted a 9 per cent return on equity, which executives blamed on investments in new initiatives. JPMorgan Chase had an ROE of 15 per cent. Goldman has also been hit harder than peers by a marketwide collapse in fixed income trading businesses since the financial crisis. 

Mike Mayo, analyst at Wells Fargo, said through-the-cycle targets “might be OK” for ROE, but that investors would like to see hard targets for the company’s efficiency ratio, a measure of expenses to revenue, so they can “hold Goldman Sachs management to account”. 

Goldman executives have decided the investor day, scheduled for January 29, will not “overweight” newer activities, including the consumer bank Marcus and the credit cards business Goldman launched this year with a partnership with Apple.

One senior executive said the thinking behind the investor day was that people should invest in Goldman “for the here and now” and that it was not “remotely possible” for the consumer businesses to generate material earnings in the next five years.

“People shouldn’t forget about the core,” another insider said. 

Initiatives to be highlighted include broadening Goldman’s investment banking business to target smaller companies, creating a cash management unit and rolling its investment management, asset management and lending arms into a single merchant banking division. 

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Goldman is unlikely to set a growth target for the merchant banking operations, said people familiar with the plan. However, it will highlight new funds — focused on areas such as venture capital, distressed credit and real estate as well as private equity and infrastructure — designed to expand the current assets under management of $135bn while also replacing some Goldman money with outside investors.

The investor day has been in the works since Mr Solomon took over 13 months ago promising a comprehensive plan for future growth.

It is “100 per cent likely” to disappoint, one senior executive said, citing the anticipation that has built among investors despite Goldman’s best attempts to downplay its significance.